Banking on the ACCC
Given house prices in Sydney and the need to take out a mortgage for the smallest of homes, even someone living under a rock would know that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has concluded and that Commissioner Hayne has delivered his final report (“Report”).
The banking world is currently digesting the Report and our colleagues have already prepared a summary of the key recommendations as well as in-depth analysis. Here, we reflect on what the Report might mean for the ACCC.
Key ACCC-related recommendations in the Report
Most references made in the Report to the ACCC relate to the ACCC’s Residential Mortgage Price Inquiry (“Mortgage Inquiry”) or the Northern Australia Insurance Inquiry, whose final reports were delivered in late 2018. However, there are some other notable references to future roles for the ACCC:
Home lending through mortgage brokers – working group and monitoring
Commissioner Hayne was critical of some of the practices involved with home lending through mortgage brokers – for example, the conflict arising from commissions paid by lenders to brokers (because the size of commissions has an effect on which lender the broker recommends to the borrower), or the broker providing incomplete or false information (which may be motivated by the broker only getting paid if the loan application is successful).
Perhaps the most significant recommendations in this section of the Report are that the law should be amended to require mortgage brokers to act in the best interests of the borrower, with the borrower (not the lender) paying the mortgage broker’s fee.
To monitor whether the proposed changes have the intended outcomes, Commissioner Hayne recommends a working group led by Treasury and including representatives of the ACCC and APRA. The working group would consider the effect of these changes on interest rates, on competition between lenders, and on competition between lenders and brokers.
Commissioner Hayne also recommends that to create a level playing field between banks and brokers, banks should be required to charge customers a fee based on the costs that are incurred by the bank when there is no broker. It is recommended that the Treasury-led working group or the ACCC monitor the fees set by banks to ensure that they reflect the bank’s additional costs (presumably, this task would be similar to the ACCC’s Mortgage Inquiry).
Reducing or eliminating the conflict – no structural separation, but market studies
In this section of the Report, Commissioner Hayne addresses his concerns as to conflict between advisors/licensees who benefit financially from clients acting on the advice that is given.
Many in the banking world wondered whether the Commissioner would recommend enforced separation between product and advice. The Report does not make such a recommendation noting that:
Enforced separation of product and advice would be a very large step to take. It would be both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs, and the Productivity Commission concluded that ‘forced structural separation is not likely to prove an effective regulatory response to competition concerns in the financial system’. I observe, however, that the Productivity Commission recommended, and I agree, that commencing in 2019, the Australian Competition and Consumer Commission (the ACCC) ‘should undertake 5 yearly market studies on the effect of vertical and horizontal integration in the financial system’.
Accordingly, we expect the ACCC to be tasked to undertake regular market studies, focusing on the competitive effects of both vertical and horizontal integration.
ASIC’s and ACCC’s remits – retain the twin peaks model
The Report notes that there might be some advantages to detaching parts of ASIC’s remit (eg financial services consumer protection) and transferring them to the ACCC.
However, Commissioner Hayne concluded that the process associated with such a change would “would disrupt the processes of responding to what has happened in the Australian financial services industry”, concluding that the costs of that disruption outweigh the possible benefit.
Rod Sims calls for more competition
Shortly prior to the release of the Report, Rod Sims called for more competition to address the “cosy oligopoly” of the Big Four banks. Speaking to the Financial Times, Mr Sims suggested that more competition was necessary to make the Big Four banks “feel under threat”, flagging that the ACCC is investigating the removal of regulatory barriers to better facilitate consumers switching banks. This includes using market studies to identify regulatory and legislative solutions.
Coupled with Commissioner Hayne’s recommendation for market studies (see above) it seems that organisations in the financial services industry will continue to receive regulatory notices to produce documents and information for some time yet…
…so there’s no hiding under a rock for the banks.